Nengi Phil-Ebosie: Here’s Why Debt isn’t Really a Bad Thing

“Forgetfulness….A gift bestowed upon debtors in compensation for their destitution of conscience” – Ambrose Bierce “Capital as such is not evil, it is its wrong use that is evil. Capital in some form or other will always be needed”- Gandhi

Debt is such a big topic; but lately, there has been so much discussion relating to debt.

There are several school of thoughts regarding debt. There is a school of thought that believes it is a taboo to borrow money. To them the slogan is “I can never borrow”.

To another school of thought, they feel agitated and wonder with the question “what do you mean you can never borrow”? Persons in this school of thought are very open to borrowing.

With no apologies, I belong to the school of thoughts of the latter. I don’t see anything wrong with borrowing provided you have the capacity to pay back and most importantly used for the specific purpose for which the debt is incurred in the first place. The question is has the debt been used to increase your net worth or in generating more value/wealth or in funding consumption?

What is debt? Debt is an amount of money that you owe to a person, bank, company, etc. It is also an obligation to pay another. One acquires debt when one borrows money for a specific purpose, such as funding a business, meeting an immediate personal need or purchasing a house or simply just funding a lavish lifestyle. However, there is a problem when you begin to borrow to maintain a lifestyle you are unable to sustain, a term often referred to as “Keeping up with the Joneses”.

Debt can sometimes feel like a heavy load hanging around your neck, May be that’s why we have the school of thought of “I can never borrow”.

It has its heartaches and benefits. The burden of debt can often lead to financial, physical and mental health issues. People who struggle to pay their debts often suffer from mental health issues such as depression and anxiety.

I have been able to classify debt to; • Unprincipled debt and • Necessary debt.

Unprincipled debt Unprincipled debt is that which does not increase or improve your financial position/wealth and/or is used to purchase goods or services that have no lasting value. While no one would argue against ever buying a non-essential item, you can put yourself into crippling debt too easily by not restraining yourself from buying luxuries that you don’t really need, or impair on your ability to pay in a timely manner. Borrowing to fund a lifestyle usually falls under the category of unprincipled debt. Having a debt that doesn’t increase your wealth would have a negative impact.

Necessary debt I always state that “YOU NEED MONEY TO MAKE MONEY” and borrowing to make money is not a crime and will never be a crime.

Necessary debt covers debt that used for:

Investment, to make more than it costs to borrow In general, necessary debt is that which increases your net worth and/or helps you to generate value. Necessary debt allows you to manage your finances more effectively, to leverage your wealth, to buy things you need and to handle fruitful emergencies.

Scenario 1: Most of us cannot afford to pay for a home with cash. Borrowing to finance a home allows you to pay back a home loan over time, with the hope that the home itself will increase in value, so that when and if it is sold, you can realize a profit. In addition, the interest you pay to a bank or Mortgage Company is usually tax-deductible, so while you are paying for the privilege of borrowing money, you are saving on your tax bill. Scenario 2: Imagine a smart investor who wanted to enjoy gains from the FX market borrowed N3m at the rate of 30%p.a with a repayment period of 365 days.

The investor with the N3m loan gains access to the market at the rate of N378/$1 in July 2016 and purchased $7,936.51 would make a profit of N359,523.81 even after considering the 30% cost of borrowing amounting to N450,000.00 upon exiting the market in October at the high of N490/$1. Cool Right? This is only cool if he makes profit as the market is a high risk, high return market.

Borrowing for Business Good ideas, hard work, ambition and luck are not always enough to launch or support an entrepreneurial endeavor. Seed capital or small business loans are often a necessary component of building and sustaining a profitable commercial enterprise. Borrowing money to build wealth is another example of taking on good debt to create future value.

It is often said that the easiest way to raise funds is from friends and family but lately, people who borrow from friends do not want to repay.

It is often reported that the debtor even flaunts very expensive items they bought in front of you (creditor) and not bothered that they owe you. They pretend to have forgotten they owe and say nothing, regarding the monies owed. Although some may genuinely not have the funds to pay.

I have a friend (Madea, the creditor) who told me she has been pleading with Shaba (debtor) to repay what she loaned Shaba for about a year now. It was so funny because Shaba replied Madea asking her to pray for her so she will be able to repay but according to Madea, Shaba wears new clothes to church and yet has owed her for almost a year. Madea has resorted not to loan anyone any money again and to only give what she can afford to waive just in-case the debt is not paid back.

Perhaps for reasons such as this and others, people like Shaba understand they have a terrible repayment habit, are in the school of thought of “I Can never borrow money”

Lately, it has become increasingly difficult to get a loan from friends/family. Perhaps from bad experience such as these from debtor not meeting repayment obligation.

Negative effects of not meeting past due obligations • You lose your credibility. • Your word is no longer your bond. • You may not be able to go back to the same person to borrow again. • In that time of dire need, the people you could have fallen back on would neglect your plea because of past terrible experience. • You will always be on the run from the creditor. • With the financial institutions, you may be unable to secure fresh loan until the bad loan is fully paid as financial institutions (Even in Nigeria) now have access to credit check with the Credit Bureau. • For companies, it may attract litigations and threaten corporate existence. • These legal proceedings may tarnish the image of the company • Overdue high interest cost.

What to do if you are unable to pay as at when due? • Do not go AWOL. Call or communicate with the creditor (Friends, relatives or financial institution) and explain the reasons for the delay in repayment. Negotiate a new date for the repayment and possibly a repayment plan. • If the loan is from a financial institution, try to renegotiate the debt in terms of a realistic repayment terms and dates. • Honour renegotiated terms.

Please share your thoughts on which school of thought you fall into and possibly your good or bad experiences when you leant money to friends/ families.

I will end with these quotes. “You must gain control over your money or the lack of it will forever control you.” ― Dave Ramsey “Money is good for nothing unless you know the value of it by experience” – P. T. Barnum

About Nengi Phil-Ebosie

Nengi Phil-Ebosie is ardent reader of BellaNaija. She has several years working experience which spans across Treasury, Funds and portfolio management and financial planning. A Foodie and LOVES The Game of Thrones. She is a lover of God and is married with two children. Instagram @nengidambo, Email [email protected]

A good lesson to all…and apt to all who are unsure of what to do in a recession. Truly, without Money, more Money can’t be created. Nengi has put it well for us all, not only to ruminate over, but to act. Well written, Nengi.

Nicely written welldone. Recently i came across a write up that says mortgage is better than rents. Initially i was aganist getting a mortgage to buy a house. But reading this piece, more insight gained. Thumbs up

This is a nice write up, i especially liked the part on the school of thought that believe its ok to borrow, i find myself many times in an opportunity to borrow without any suitable business venture to channel the funds to, it takes a great deal of strength to turn the other eye and not borrow, sometime i borrow just because i know i can pay back, i keep the same funds, use it as a buffer for living expenses, then when repayment time shows up, i simply add back and repay.